Wednesday 17 January 2018 ShareProphets: The one stop source for breaking news, expert analysis, and podcasts on fast-moving AIM and LSE listed shares

Some facts about Gulf Keystone’s debt

By Ben Turney | Tuesday 17 November 2015

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

After my Gulf Keystone (GKP) piece last week (HERE) drew the predictable furious response from Winnifrith (HERE), I’ve been looking into the company’s numbers in a bit more detail. There’s no denying that Gulf is teetering on the edge. However, it is not dead yet. Although it has little to no room for error, so long as the Kurds keep up their regular payments, it is possible that Gulf will be able to pay down its debt and refinance its balance sheet by April 2017. A broker note found its way into my inbox today, broadly supporting this view. It contained some interesting observations on Gulf’s debt position worth sharing.

I would mention which broker released the note, but this firm has been unnecessarily pissy with ShareProphets in the past about publishing its work. No doubt, the note is circulating on the Internet, but the key points about Gulf’s debt are as follows:

  • Gulf’s debt is primarily split across two bonds:
    • $325million at 6.25% maturing in October 2017
    • $250million at 13% maturing in April 2017
  •  The next coupons (interest payments) worth $24.6million are due in April 2016.
  • Gulf must maintain its Debt Service Reserve Account above $32.5million to ensure it does not break a key debt covenant.
  • Gulf’s cash balance in the middle of October was $76.2million

For Gulf’s shareholders the risks are clear. This has the potential to be another Afren if anything serious goes wrong.

So much depends on the Kurdish Regional Government (KRG) maintaining its regular payments. To be honest, the company probably needs the Kurds to increase those payments, but if there are any further delays Gulf has very little in reserve to act as a buffer.

It is now 17 November and we haven’t heard whether or not the KRG has issued another monthly payment. It should have done by now, so it is little wonder that Gulf’s share price closed down at 25.75p last night. My risky punt of last week grows ever riskier. 

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  1. ‘Gulf’s cash balance in the middle of October was $76.2million’

    Ben this was before the last coupon payment payable in October – post the coupon payment the cash dropped to below $50million at which point Gulf must engage in dialogue with bondholders although I doubt much will happen.

    Whats still not clear is at what level they can keep OPEX and CAPEX at to preserve cash, while at the same time continuning to maintain production and develop.

    Even if they can manage to struggle on servicing debt, I still don’t see the equity as being worth very much beyond what the debt is worth. At some point they will have to go back to CAPEX spending and that will require more funding. The other alternative is to sell out, but in this oil environment and in a country with an uncertain future and poor at paying its a buyers market.

  2. Oh dear ………. I have a feeling its “gonna hurt in the morning” but good luck with it anyway.

  3. Daniel Victor

    There has to be more to it than that.If Gulf Keystone could just about make its interest payments,surely its bonds would be a steal at current levels.

  4. @Steve – yes good point. I should have added that. Mistake on my part, apologies.

    @wildrides – I’m not in this one, but thought I should publicise these numbers

    @Daniel – I made a similar point in my last piece. So long as Gulf’s assets stay about $200million – $250million the bonds look an incredible steal at the moment. I believe they sell in parcels of $200,000

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